Fed banker's comments jolt markets

REGIONAL REACTION Talk of a potential increase in US interest rates caused Asian stocks to decline on worries about the effect on US consumer spending

BLOOMBERG

Asian stocks fell after a Federal Reserve banker said US interest rates may need to rise to curb inflation in the world's largest economy.

The Morgan Stanley Capital International Asia-Pacific Index lost 0.1 percent to 129.83 at 5:25pm in Tokyo, after earlier rising as much as 0.2 percent.

"Markets anywhere aren't about to do much for as long as this interest rate debate carries on in the US," said Don Hamson, who manages US$4 billion at State Street Global Advisors in Sydney.

Japan's Nikkei 225 Stock Average dropped from a three-month high, sliding 0.1 percent to 16,163.03. Consumer finance stocks fell after the Asahi newspaper said regulators were investigating lending practices at Acom Co for a second time this year.

Australia's S&P/ASX 200 Index added 0.1 percent. Brambles Industries Ltd, the world's largest supplier of storage pallets, had its biggest jump in two years after second-half profit more than quadrupled. Markets also rose in New Zealand, Malaysia, Indonesia, Sri Lanka and Pakistan. They fell elsewhere.

Federal Reserve Bank of Chicago president Michael Moskow said on Tuesday that the US central bank may have to resume increasing borrowing costs to contain inflation. The Fed this month kept interest rates unchanged after 17 consecutive increases in the past two years.

Higher borrowing costs in the US may prompt some Americans to curb spending on Asian-made goods.

Samsung Electronics, which accounts for about a 10th of all South Korean goods sold abroad, declined 1.8 percent to 646,000 won (US$676.89).

Moskow isn't a voting member of the rate-setting Federal Open Market Committee this year and has always joined the majority decision when he had a vote.

Interest-rate futures show an 11 percent chance of a quarter-point boost in the Fed's benchmark to 5.5 percent when policy makers meet on Sept. 20. The odds of an increase in the rate for overnight loans between banks by year-end are 50 percent, down from 71 percent a week ago.

"Half of the market is saying that the Fed rate hike is likely to be over while the other half believes that there's more to come and this indecision is causing an effect on the market," said David Smeed, a Singapore-based fund manager at Stork Capital Asia, which manages about US$25 million in assets.

"Momentum is waning and until we see more certainty, we're staying away from technology stocks," he said.

Shares of Asian exporters may underperform for the rest of the year as US customers negotiate lower prices amid a slowing economy, according to Markus Rosgen, Citigroup Inc's Hong Kong-based chief Asian strategist.

He recommends holding fewer technology stocks than are represented in stock benchmarks.

Brambles surged 6.1 percent to A$11.50 (US$8.80), its biggest jump since August 2004. Net income rose to US$1.21 billion in the six months ended June 30, from A$250.9 million a year earlier.